Two Harbors Investment Corp (TWO), HCP, Inc. (HCP): These Three Companies Are Diluting Shareholder Value

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As a value investor, one thing that always puts me off investing in a company is the dilution of shareholder value through constant issuance of new stock.

Although it’s sometimes done with the best intentions in mind, such as the re-payment of debt or increasing CAPEX spending, stock issuance can completely erode shareholder value on a per share basis. That said, it can also benefit shareholders over the longer term; if the company uses the cash correctly, it can increase shareholder equity and returns significantly and possibly even re-purchase the stock at a later date to improve per-share shareholder value.

Even so, if a company is consistently and repeatedly issuing stock every year, eating away at per-share value, this can be a dangerous sign for any investor and a key indicator of poor financial performance.

Diana Containerships Inc (NASDAQ:DCIX)

Diana Containerships is a relatively solid shipping company that has been making profits the last few years despite the economic turmoil and the poor state of the shipping industry.

The company has low levels of debt, cash on its balance sheet, and a current ratio of 5, indicating good short-term liquidity. In addition, the company trades below its net asset value per share, which presents any investor with a margin of safety, especially in such a depressed industry.

Two Harbors Investment Corp (NYSE:TWO)However, Diana Containerships Inc (NASDAQ:DCIX) has been issuing stock in place of debt during the last few years and now, while total shareholder equity has risen 180%, the actual book value per share has fallen 47%, meaning that any investor who brought the stock back in 2010 at a price-to-book ratio of 1 would have seen his or her investment lose 47% of its value.

2010 2011 2012
Shares In Issue 6.1 23.1 32.2
Net Profit -$2 $4 $6
Shareholder Equity $85 $207 $239
EPS N/A 0.17 0.18
P/B 13.9 8.9 7.4
Net Income Growth N/A N/A 50%
EPS Growth N/A N/A 5%
Shareholder Equity Growth 144% 15%
P/B Growth -36% -17%

Figures in US $ millions, except per-share figures

Diana Containerships Inc (NASDAQ:DCIX) has issued 26.1 million additional shares since 2010, increasing the share base by 280%. While this has improved shareholder equity and net profit, earnings per share (EPS) have remained static and the book value per share has almost been halved.

Indeed, the bottom of the table shows that shareholder equity grew 144% over 2010-2011, while the book value per share fell 36%.

TWO Harbors Investment Corp (NYSE:TWO)

Mortgage REIT TWO Harbors is another offender. Actually, the majority of mortgage REITs are using the same practice, issuing shares to bolster finances. Unfortunately, although this practice is increasing shareholder equity and increasing dividends, it is actually driving down the EPS and the asset value per share figures of the company, as shown below.

2010 2011 2012
Shares In Issue 22.4 98.8 242
Net Profit $35.8 $127.4 $287.4
Shareholder Equity $382 $1,270 $3,450
EPS $1.60 $1.29 $1.19
P/B $17.05 $12.85 $14.26
Net Income Growth N/A 256% 126%
EPS Growth N/A -19% -8%
Shareholder Equity Growth 232% 172%
P/B Growth -25% 11%

Figures in US $ millions, except per share figures

Per-share figures such as P/E, P/B and EPS are key metrics used by investors to value companies, even though they may not be true representations of the company’s actual performance. Indeed, while Two Harbors Investment Corp (NYSE:TWO) grew its net income 700% and shareholder equity 800%, the company’s per-share metrics actually fell or remained static.

As a result, investors shunned the company, thinking that its growth was stagnating and the share price only gained 13% during the 2010-2012 period, even though the company’s income grew substantially.


HCP is another REIT that has been issuing shares in order to pay for acquisitions but has slashed shareholder returns in the process. One of the main attractions of REIT investing, especially in non-financial REITs, is that REITs have stable earnings and solid net asset values backed by property. However, in the case of HCP, Inc. (NYSE:HCP), the company’s earnings per share and book value per share are somewhat erratic.

Indeed, an investor who purchased shares at book value of $25.15 in 2010 would have seen book value swing from $22.69 per share in 2011 and then move back up to $24.71 per share in 2012 – still below his or her initial entry price.

In addition, the investor would have been faced with earnings per share rising much slower than net income, which would leave any investor feeling shortchanged; during 2011, net income grew 41% while EPS only expanded 8%.

However, HCP, Inc. (NYSE:HCP) did issue fewer shares during 2012, and EPS growth only lagged that of net income slightly (EPS grew 40% compared to net income growth of 50%).

2010 2011 2012
Shares In Issue 305 398 427
Net Profit $377 $532 $797
Shareholder Equity $7,670 $9,030 $10,550
EPS $1.24 $1.34 $1.87
P/B $25.15 $22.69 $24.71
Net Income Growth N/A 41% 50%
EPS Growth N/A 8% 40%
Shareholder Equity Growth 18% 17%
P/B Growth -10% 9%

Figures in US $ millions, except per share figures

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